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Andrew Racz

Andrew Racz

Posted: November 16, 2007 01:47 PM

The Mongolian Wakeup Call


For Mongolia more than perhaps to any other emerging nation, this is the 21st century.

The facts are as follows. Mongolia, is one of largest countrys in the world and has a gross national product of less than $2 billion and a small population of 2 million people. This little country which can be historically described "a far away county about which we know nothing" can plunge into international interest and international significance.

The time has granted Mongolians a place in the world history. Mongolia is becoming an important country in what is called the Commodity Boom. It has been stated that in the last six years, the commodity index of the world has gone up fivefold and some experts project that this upward trend will continue - commodities of copper, iron ore, nickel, and molybdenum are raising.

What does the world know about Mongolia? For centuries, it was occupied either by the Russians or the Chinese. The movies show that in 1941, Mongolian troops on horseback liberated Moscow. It was a cold winter. Historically, over a thousand years ago, both the Finnish and the Hungarians left Mongolia.

Mongolia has a sister nation in Europe, namely my country, Hungary. The friendship has preserved a historical thousand years and today, I am told that in Budapest in the best university called Eötvös Loránt has a faculty, the Inner Asia with Mongolia being the most important part.

This historical tie has not only survived because of heritage. Actually, in the last century, both Mongolia and Hungary badly suffered from foreign occupation. Today, after 1990, Mongolia and Hungary still do business with Russia, but we should never forget those foreign forces that shaped the fate and our daily life not so long ago. This is why our unique relationship is a valuable, historical tie between a faraway country and a former satellite of Eastern Europe, Hungary. This historical relationship may become handy in the political and commercial world in the current decade.

Let's be blunt. Mongolia was oppressed by the Russians. Russia has never been a friend of Mongolia, and Russia, while a business partner today, has never been a true equal friend of Hungary. In the 21st century, you will be doing business with Russia; we will be doing business with Russia. But let us never forget that great powers, great forces will not be generous either to Mongolia or to Hungary.

There is a saying, which is I presume international, that mathematicians only talk to mathematicians; that Prime Ministers only talk to Prime Ministers, and chess masters only talk to chess masters. Mongolia and Hungary speak the same political language.

An unexpected development in Mongolia now brings your country to the limelight. The discovery of the largest copper and gold mine in the history of mankind is in Mongolia. In order to develop and bring this mine to production, negotiations have been conducted between Mongolia, the cabinet, the parliament, and the Mongolian National Mining Association with basically two western companies - Rio Tinto and Ivanhoe. Rio Tinto is the world's second largest mining company, owns ten percent of Ivanhoe, and has the option to buy another thirty percent.

The negotiations have gone on for a long time. Meanwhile, world events are putting Mongolia into an historic and complicated position.

At the moment, global investors are carefully watching what happens in the so-called Oyu Tolgoi investment agreement. Their official position is that after five years of negotiation, the Mongolian cabinet has approved the agreement, but it is now stored in parliament.

Let me now explain what I see behind the facts. The Rio Tinto/Ivanhoe consortium has so far spent close to $1 billion on the project. It is difficult to keep them going without an agreement about production as they have to cover all the expenditures from their own resources. No bank would lend against a hypothetical program.

There is a question mark among the international investors as far as the future of Oyu Tolgoi and the future for other companies in the mining industry in Mongolia.

In the 21st century, the major steps in mining and the history of many countries is decided by money. The gross national product of Mongolia is $2 billion. The potential resources of Oyu Tolgoi, which has 71 billion ounces of copper and 31.3 million ounces of gold, represents a total value of between $60 billion and $100 billion. And the projected production of 1.6 million ounces of copper at $4.00 would represent roughly $6 billion. And the production of 900,000 ounces of gold a year at $1,000 per ounce price would represent a billion.

In 2007, due to major mining discovery, Mongolia is bursting on the world scene. It can provide four to five billion dollars worth of copper, gold, and uranium at a time when there is a commodity shortage, where prices of commodities could increase manifold, and gold can play an important role as a new currency in our monetary unstable world.

In five years, people will look at Mongolia as a very important country.

Actually, $5 billion GNP for a population of 2 million is $25,000 per annum. Higher than Russia or China. Potential capital surplus of $2 billion per annum is higher than the USA. With money to develop the infrastructure, there will be a place for a Hilton, Wal-Mart, and Apple Computer store.

In the face of a promising future, there is a stumbling block of the so-called investment agreement negotiated and approved by the government of Prime Minister Enkhbold and being favorably reviewed by the incoming Prime Minister of Sanj Bayar. The agreement is the result of five years' intense negotiation which would provide the capital and the expertise and the marketing of the Mongolian copper and gold. It is also called the Oyu Tolgoi mining agreement.

As Mongolia steps into the 21st century, it should enter the century that is government by commercial contracts. In a turbulent world which has Iraq, Iran, Pakistan, the stability is not brought by armament, but contract. Mongolian prosperity, independence, and future, rests in the written contracts signed by recognized international companies. Unfortunately, at least for the last century, neither Mongolia nor many small countries had the opportunity signed on the dotted line.

For the small nation of Mongolia, $5 billion is a very big sum of money. It has now occupied the minds of politicians how to divide this money up, what agreement to make, and unfortunately, we reached the worst possible scenario to have no agreement.

Meanwhile, in contrast to a $5 billion production and the mining value of let's say 75 billion, the numbers are meaningful, but not so meaningful.

Rather than saying the word not so meaningful, there are other big numbers who rule this world. There are investment companies in Australia that manage $5,000 billion. In the United States Fidelity manages $1.5 trillion. The surplus reserves of China consists of $1.25 trillion which China wants to invest in other avenues other than U.S. Treasury Bills. The Russians probably have $250 billion in surplus reserves; Dubai and Qatar, over $500 billion total surplus reserves.

The world is so big that when the largest brokerage company in the world, Meryll Lynch, loses $8.4 billion, the security analysts point out that it is "manageable." In other words, the largest loss in MER's history is bigger than the one year potential total production of Mongolian mining once it is in full swing three or four years from now.

These huge forces suddenly envelope Mongolia. The second largest mining company Rio Tinto is being offered something like $165 billion by the largest mining company in the world, BHP, in Australia. The total value of the companies will be $360 billion, substantially bigger than the ownership of the Mongolian Oyu Tolgoi.

From the Mongolian cabinet and the parliament and the small number of people who amount to just over 2 million, the current gross national product is less than $2 billion. Meanwhile, one company alone may control a $360 billion market value, and indirectly would own all the productions rights of the copper and gold venture in Mongolia.

Furthermore, we have learned the last few days that the China Development Bank has under one percent stake in Rio Tinto. That number by now could have increased to two percent. It can go to up to ten percent. Ten percent of $165 billion is $16.5 billion, in fact probably the largest stockholder and probably the largest voice in developing Mongolian reserves.

I am not suggesting there is anything sinister. I am only trying to point out when one fifth of the world's copper productions is from BHP and Mongolia is at stake, do you have a free voice?

Actually, you do. There is a way to protect yourself.

The western world, in fact technically the whole world since 1991 when Mongolia got liberated, is based on commercial contracts. The contracts are made by sovereign companies, sovereign nations, and it's very difficult to break.

I am pointing out the following: there is tremendous monetary turmoil in the world which engulfs mining. The current takeover effort of BHP and Rio Tinto is already encouraging Chinese companies to go abroad and buy mining assets. As a hypothetical example, the bid for Rio is $143 billion. A combination of Chinese mining companies can certainly raise $200 billion. At that time, Rio, which owns 40 percent of the Oyu Tolgoi mining complex would be directed by the Chinese.

Today Mongolian government is negotiating with the Ivanhoe-Rio Tinto corporate partnership.

If Rio is bough by the Chinese, Mongolia would be negotiating with the Chinese.

I don't want to insinuate which is better for Mongolia.

As far as my personal preference is - stay commercial. Sign a commercial agreement which obviously carries the spirit of political independence.

I was told that yesterday the American Ambassador to Mongolia, the Right Honorable Ravdan Bold left for Mongolia to speed up the confirmation of the new Prime Minister and expedite one of the commodity world's most important commercial contracts in the world, which is also the most important contract between Mongolia and Western Corporation.

If so, then in Mongolian's modern history, it is Chapter One.